The past, present and future of cheap petroleum
In 2000, the world price of crude oil more than doubled, to over $30 per barrel. There were protests over the high price of fuel by motorists, truckers, fishermen and farmers, as roads, ports and refineries were blockaded. Politicians urged producers to increase production to bring the price down. What controls the price of oil, and what does the future hold?
Today, the price of crude oil is determined largely by economic, political and business factors. No one today mentions the concerns that were so prominent in the 70s and 80s of exhaustion of resources. The energy minister of Saudi Arabia foresees no problem; he says oil will go on forever. Forever, for a politician, is about ten years. However, implacable physical restraints lurk in the shadows, and for the first time, this crisis gives evidence of their appearance. Exhaustion of resources, so far, has been evidenced mainly by a shift in productive regions. The world-wide market conceals local changes. the United States, largest user of petroleum, can no longer supply its needs by domestic production, nor even significantly influence markets.
The short-term behavior of the price of petroleum is not influenced by the exhaustion of local resources or by any fear of general exhaustion. Current resources, drilled and connected to markets, can be produced at any reasonable rate, and will be produced as long as the price received covers the cost of production. A lower price will simply induce greater production to maintain revenues, so prices are unstable. A low price discourages additional drilling and investment in transport and refining facilities. When the supply becomes tight, the markets react with panic, driving the price up sharply. This creates an incentive to drill and develop, and the cycle begins anew. When additional drilling fails to produce additional petroleum anywhere in the world, there will be a market catastrophe. Any "strategic reserves" held in storage will last only months at normal rates of consumption. It will be a brick wall, unseen until it looms out of the fog.
In order to understand this, let us first review the nature of the petroleum resource. Petroleum is hydrocarbon matter that is useful as a fuel, and as a chemical feedstock. It exists in solid, liquid and gaseous forms in the pore space and cracks in rocks. Some rocks are not only porous, but also permeable, so that liquid and gaseous petroleum can flow through them as well as being stored there. These rocks are almost exclusively sedimentary--sandstones, conglomerates and limestone. Solid petroleum, and that in impervious rocks, such as shales, must be mined and processed to separate it from the rock.
Petroleum is the biologically and chemically modified remains of unicellular organisms, such as bacteria, that were preserved in an oxygen-free environment. Coal is the chemically modified remains of woody plants and other vegetable material preserved under similar condtions. Normally, the remains of living matter disappears when exposed to oxygen and microorganisms at the surface of the earth. Quite special condtions are required for the preservation of carbon-containing residues. The petroleum or coal is formed by mild heating and pressure that induces chemical changes making the composition more uniform, and releasing gases, such as methane.
Liquid petroleum can migrate from the source rock to permeable, porous rock very slowly but very steadily under the pressures of deep burial. It can then collect in regions where it is trapped, as in a dome or at a fault, and go no further. Here it remains, and the gas that separates from it collects at the highest points, while it floats on the salt water that is usually present in every porous, permeable rock. Only a small part of the petroleum is preserved in this way; most either remains where it was formed, is altered to carbon by heat, or escapes and is dissipated. The process just described requires millions of years and unusual conditions. Very little petroleum is being formed at present, so the store of fluid petroleum is fixed and finite.
The first modern use of petroleum as a fuel took place in the 19th century, when oil shale was mined and heated to change the solid petroleum it contained, called kerogen, into a liquid that could be used as an illuminant. This industry began around Nottingham, in England, and for many years there was a large shale oil plant not far west of Edinburgh in Scotland. In southern Russia, near the Caspian Sea, wells were being drilled in the late 1850's for liquid petroleum in an area long known for oil seeps.
Northwestern Pennsylvania was the land of the Seneca Iroquois. They skimmed oil from ponds by spreading out a blanket beneath the floating oil, then lifting the blanket, which carried the oil with it. The oil was bottled in small vials and sold in Pittsburgh for $1 as a rheumatic medicine. Oil was sometimes encountered when drilling for brine in Virginia and Kentucky. It was a nuisance, but spectacular when floating oil caught fire. Edwin L Drake and some promoters drilled a well near Titusville specifically for liquid petroleum, or crude oil. When the well was completed, in 1859, the product sold for $40 a barrel. The first oil boom, in full swing in 1862, then occurred, and oil dropped to 10 cents a barrel. It was stored in open ponds, taken to Pittsburgh in leaky boats, and by rail to Cleveland. Simple distillation removed the lighter components, or naphtha, and left the thick residue in the pot. Both were tipped into the Cuyahoga, but the middles were an excellent illuminating oil, called rock oil or paraffin or kerosene. They soon dominated the field, driving out more expensive or less desirable illuminants.
Oil was originally shipped in barrels, like any liquid product at the time. Since barrels differed in capacity, it was decided in 1866 that a petroleum barrel was to be 40 gallons plus a 2-gallon allowance, 42 gallons in all. This US Petroleum Barrel, adopted by the Petroleum Producers' Association in 1872, has remained the standard, 9702 cubic inches or about 159 litres. The crude oil in such a barrel weighs about 300 pounds. However, by this time oil was shipped in bulk in tank cars. The petroleum barrel is a rather big barrel, as barrels go, though the modern equivalent is the 55-gallon steel drum.
John D. Rockefeller soon monopolized the refinining capacity in the oil capital of Cleveland, by means fair and foul. He was smart enough not to monopolize risky drilling and competitive production, since the copious flow of oil guaranteed him a low price for however much he needed. When Pennsylvania oil began to decline, there was real worry that a shortage would soon occur. Discoveries in the midcontinent and Texas soon comforted that fear. However, the sweet, paraffin-based crude of Pennsylvania was long preferred for making fine lubricating oils. Present day refineries, however, can make anything out of anything, and there is no longer any advantage to Pennsylvania crude. In fact, there is no more Pennsylvania crude.
Most valuable things have to be worked for, but here we have something else. The closest thing to a free lunch is crude oil. All that is necessary is to sink a hole to the reservoir rock. Then the permeability and the pressure drive oil into your hole, and often right out the top in a gusher. You have to throttle it off to avoid drowning the vicinity. When the pressure decreases, you then must pump the oil out as it collects in the hole, but this is still easy compared to real work. Do not think that you can suck oil out of the ground; you cannot. When the reservoir pressure decreases too much, the oil stops, and you must look elsewhere. Much of the oil is left in the ground, unavailable, even by mining, since wells can be much deeper than mines. In some cases, you can inject gas to restore some pressure, or inject water at the boundaries of the field to drive oil towards your wells. This secondary recovery can help, but much oil is still left in the ground anyway.
There are expenses, of course, in getting oil. It is expensive to drill a well, especially to great depths. It is expensive to outfit a well to produce the oil and prepare it for transport to the refinery. It is very expensive to determine where to drill a well to find oil. At first, you simply looked for evidence like oil seeps and the twitching of hazel or willow twigs, and drilled a hole nearby. Unless you drilled in an area where oil was already known, your chances were slim. It came as a great shock that oil was found not only in Pennsylvania, but also in Texas (one geologist said he would drink all the oil ever found in Texas). Soon the United States was awash in oil, and the prices paid to producers fell to ridiculously low levels. When a great oil field was discovered in East Texas in 1930, depression conditions lowered the price to 10 cents a barrel. Refiners, like Rockefeller, had no problem: their raw material was cheap, and they could control the prices at which they sold to consumers.
Since the mid-1900s, geology and geophysical prospecting have advanced greatly, and gradually the whole world has been explored to find places where there is a possibility of finding oil. It has become possible to drill wells in shallow continental seas, which added greatly to the oil that is available. Nearly every good prospect has by now been tested. It is useless to drill in the deep seas, or into igneous or metamorphic rocks. It is still impossible to tell whether oil is actually present at a given place, and whether pressure and porosity are sufficient to make it exploitable, but good indications are given of condtions that might favor the accumulation of oil. Most exploratory holes, however, are dry. These days, this is the usual result. It is, therefore, impossible to state how much oil is available to be produced with any exactness. That the amount is finite is without question.
In the United States, a typical large vertically-integrated oil company produced oil in its own wells, refined it at its own refineries, and sold it at its own outlets. The reservoirs were drilled enough to provide good data on future production, and the amount of oil available was called the proved reserves. As wells went dry, additional wells were drilled to develop the resource at the rate necessary to supply demand. New reservoirs were found or acquired by the exploration department, to keep the reserves at a comfortable level. Quotes of petroleum reserves are not statments of how much oil is ultimately available, only how much has been currently developed. If more oil is needed, one must simply go out and find it, and there was no doubt that this could be done.
In the Oil Crisis of 1973-74 that led to OPEC, Texas alone could open its valves and supply the world market, not just the American market. Those days are now well and truly over. The United States cannot supply even its own market; domestic production supplies less than half the demand, and is steadily decreasing, since there is no more cheap oil to be found. There was a lesser crisis in 1979-80, again mainly due to political factors, and a steep price rise in 1992 because of the Desert War. Oil companies now get their oil on the world market, and have lost control of their supplies. There is little new oil to be found in the United States. New production methods, and secondary recovery, are gleaning what is left. Even the Alaskan resources are declining, and will be less and less important. North Sea oil has passed its peak, and production is now declining. What is happening to the United States is now beginning to happen to the world. The oil consumption of Western Europe and Japan actually decreased a little after 1973, and the United States managed a 14% decrease. The Eastern Bloc, however, increased its consumption by 40%. The Third World is now a rapidly growing source of demand. In 1999, world production was about 75 million barrels per day (mbpd), and a 2.4% increase was foreseen for 2000.
The geophysicist M. King Hubbert (1903-1989) studied the production history of an oil province, and created a model that predicted the production curve, called the Hubbert Curve. He predicted that petroleum production would peak in the U.S. between about 1965 and 1975, and this prediction proved true. Recently, a collaborator of his, K. S. Deffeyes, concluded that world petroleum production peaked around 16 December 2005 on the basis of Hubbert's theory, and we should soon know if this is also valid.
In the Oil Crisis of 2000, which was mainly a doubling of price from about $15 per barrel to $30 a barrel, the decision of OPEC to increase production at the behest of the United States and Europe has brought out the observation that only Saudi Arabia has any exess capacity. The other members are already producing at maximum rate. This is the first inkling that the long-predicted maximum in total production is occurring, and that from now on, the production curve will decline. The effect on crude oil prices of even this hint has been remarkable. Should it become evident that a physical limit on production has been reached, oil prices will soar as wealth demands a very useful commodity that has up to now been priced far below its actual value, since it simply squirts up out of the ground. The oil depletion crisis will appear long before oil is depleted, and it will be characterized by a sharp increase in price and a great deal of whining.
Crude oil is marketed principally in New York, London and Singapore. Futures are sold promising next-month delivery at agreed amount, price and location, in a minimum of 1000 bbl, and are settled daily. (The abbreviation bbl really means "barrels", and its singular is bl. However, it is generally used for the singular and I shall do the same here, under protest.) Oil is priced relative to certain standard kinds of crude. In London, it is Brent blend crude from the North Sea; about 2/3 of the world's crude oil is priced in terms of Brent. In New York, West Texas Intermediate light, sweet crude is the standard. OPEC prices its oil in terms of a basket of seven crudes: Saudi Arab light, Emirates Dubai crude, Nigerian Bonny light, Algerian Saharan blend, Indonesian Minas, Venezuelan Tia Juana, and Mexican Isthmus. Individual crudes are sold at a discount or premium, depending on quality and difficulty of transport. Crude oil is a very variable commodity. The current prices of the standard crudes can be found in the daily papers.
The most valuable crude is light and sweet. "Light" means actually light in weight. The specific gravity, which is the ratio of the weights of equal quantities of oil and water at 60°F, is expressed in API degrees, °API = 141.5/(sp. gr.) - 131.5. Water, with a sp. gr. of 1.0, has a gravity of 10° API. Liquid petroleum ranges from about 16° to about 38°. The lighter components are more volatile, and generally also more valuable. As they evaporate, the crude becomes heavier and thicker. A light crude will have a gravity around 30° API. Gravity is correlated with viscosity, but the two are not the same. A "sweet" crude has less than 0.5% sulphur and actually smells pleasantly. A "sour" crude has more than 2.5% sulphur and has an unpleasant smell. Additional expense is necessary to remove the sulphur (which can be sold as a by-product).
Of course there are alternatives to crude oil, but none of them are cheap. Of all the uses of petroleum, that of an internal-combusion fuel is most sensitive to price. A quadrupling of price, to $120 per barrel, could be absorbed by chemical manufacturers, though plastics and fertilizer would have to increase in price. It would be crippling, however, to fuel-profligate road and air transport, and would devastate those at the lower end of the economic order, the fishermen and farmers. Everything based on cheap oil would have to change. The increase in price would enrich those with the oil to sell, and this implies a severe balance-of-payments problem for, in particular, the United States, with its great oil thirst and declining production.
It is curious that all the attempts to find alternatives have fallen into deep slumber. Oil shale, coal gasification, tar sands, geothermal--all are now quiescent. The nuclear age is over, along with space flight. I have heard it said that photovoltaics require more energy to manufacture than they will ever recover from the sun. Winds, waves and tides produce piddling amounts of power and substitute for very little petroleum. Instead, gas power stations are being built, since the consumer can be charged for their extra cost, and they are marginally better environmentally. How long this lasts as gas rises above $5.00 per MCF remains to be seen. In fact, natural gas will probably vanish more rapidly than crude oil in the United States, and it is not easy to transport. The problem of carbon dioxide in the atmosphere from the burning of fuels will cease when the supplies of fuels run out this century. Relax; it will not be a long-term problem.
Finite resources and exponential growth are an explosive combination. The human race seems no more able to control its numbers than the bacteria in a Petri dish, and will meet the same fate. People think only a few years ahead, while nature is forever. An Oil Crisis will be a crisis of cheap oil, and will hit suddenly and hard when physical supply problems have to be confronted. No amount of renewable energy or other fantasies can change this. Today's politicians give absolutely no hint of how they would meet the crisis, and the public is oblivious, as usual.
In late September 2000, oil releases of 30 million barrels from the Strategic Reserve, spread over a month (the time until the election), were announced. This measure was in response to the price of oil, and a thoroughly political action. Now, the US uses 15 million barrels a day, so this amounts to two days' supply. It is, in fact, a drop in the bucket. The whole 500 million barrel reserve would only last a month anyway, if it were the only source of oil in the US. The effect of this action proved to be negligible. In fact, the price of oil went up.
A large area of the north western Hawaiian Islands was also designated for the protection of coral reefs in December 2000. In this area, oil and gas exploration are excluded. This is not likely to meet much opposition from the industry, since the chances of finding oil or gas in a pile of rather recent volcanic rock is not much different from zero. Such exclusions, even in areas of greater probability, have very little effect on the overall supply. They affect mainly the short-term profit of one or another concern.
The US currently uses about 15 million barrels a day, of which 9 million barrels are imported, or 60%. In 1970, the US could supply all its needs from domestic sources, and, in fact, did so in the 1973 Crisis. In 1985, the US was importing 50% of its oil. In 2000, it is 60%. This increase is inexorable, as old reserves are being depleted, and new ones cannot be found. US oil is now too expensive to be developed at the low prices people are used to. Every attempt to force the price of oil down will discourage exploration. What has happened to the US will happen to the world, but then there will be no external source. When this happens cannot be told, but because of the attitudes of governments and politicians, it will indeed happen with a bang, as the market forces out those who cannot pay.
The 9 million barrels a day currently being imported, at $35 per barrel, cost $115 billion dollars a year. Think about this capital outflow.
In December 2000, natural gas prices rose to $8.80 per million Btu. Two years earlier, the price was $2.00. Some electric utilities use natural gas for electrical generation. At this price ($8.80) for gas, and assuming 40% efficiency of conversion, the fuel cost per kWh of electricity will be 7.5 cents. This month, in Denver, I am paying 8.5 cents (about what I paid in England last year). My supplier is using coal, and its fuel cost is less than a fifth of that of natural gas at present prices. Natural gas for electricity generation seems a bad deal, perhaps only possible because it can be forced on the consumer. It will be interesting to see what its future is at the new prices. I am paying about $7.15 for gas delivered, and this gas was probably acquired at about $4.00 to $5.00. It is still quite economical for heat at this price.
The January 2001 issue of IEEE Spectrum, which boasts "Analysis and Forecast" has some interesting reports that beg for comment. They were written just prior to the recent rise in gas prices and collapse of California deregulation, which shows just how poor and ludricrous forecasts can be. The most striking prediction is for 60% of electric power to be produced with natural gas in 2020, against 52% for coal and 15% for gas presently. Whether this takes place or not (and I feel that it will not, by a long way), it implies a huge demand for natural gas and a very high cost of electricity, which will be made with an expensive fuel. An article estimates the cost of electricity produced from natural gas at $0.04 per kWh. If $8.00/MCF is about twice the cost used for this estimate, then the estimate I made above on an energy balance alone is not far wrong, which means that the 4-cent estimate is very optimistic. It is interesting to contemplate how far people will be willing to pay four times as much for their electricity as if it came from the cheap fuel, coal.
The new plants are combined cycle plants. The gas is burned in a gas turbine, then the exhaust heat is used to make steam for a steam turbine. This makes quite an efficient plant, but the effieciency is not much better than in a good all-steam plant with modern turbines. Anyway, talk of efficiency is beside the point when the important thing is overall cost. The unforeseen rise in gas prices makes the economics very doubtful. The largest non-natural contributor to carbon dioxide in the atmosphere is exhaust from motor vehicles, not from power plants. Power plants are simply politically easier to attack.
One article touts distributed production, made possible by deregulation. This is supposed to promote "green" power, and allow myriad homeowners and small factories generate their own photovoltaic or whatever and "return it to the grid." Those who manage power distribution systems are probably not looking forward to this help. It is hard enough to manage a distribution system with all the generating facilities under centralized management. Think about restoring power after an outage. System protection becomes a nightmare. Very small amounts can probably be handled simply because they are negligible. If distributed generation is ever responsible for a significant part of the load, difficulties are inevitable. How well will the transformers work backwards? If the whole system were changed to DC (which is impossible, because of the voltage problem) it might just work. Note that when there is excess power in an area with distributed generation, all sources will tend to have excess power, and vice versa. The same article mentioned devices of advanced silliness, such as power storage in flywheels.
In transportation, which means automobiles, fuel cells, hydrogen and hybrid vehicles are again presented as offering new possibilities. They have been doing so for around 50 years, and there is little new to report except enthusiasm. For some reason, the gas turbine is not popular, although there is mention of using an internal combustion engine running at its "sweet spot", which means at constant load and speed. This is exactly what turbines are good for. It is the variability of load that made them hopelessly inefficient for automobiles many years ago. The hydrogen fuel cell has it sturdy adherents. Hydrogen does not occur in nature, but must be manufactured. It is only a way to store energy, and not a very efficient one, not a primary fuel. Its advantages are obvious, but its drawbacks are fatal, and have been so for many years. It is nothing new. What is new is the failure to produce batteries much superior to the lead-acid cells that are heavy, costly and tedious to charge. This only means that electric cars will continue to have the characteristics they have always had for the last hundred years. One remarkable proposal is to burn zinc in cars. The zinc metal is burned in a fuel cell to ZnO to generate electricity. Then, says the article blithely, the "zinc is reconstituted." This means putting in a lot of energy to reverse the burning. The overall efficiency can hardly be as high as that of an IC engine. The zinc is merely chemical storage of energy, not a primary fuel. A similar proposal uses aluminum. One of these sunshine-from-cucumbers proposals may indeed be a good route to mobile energy, but the energy will probably come from coal anyway.
The most significant development recently is the drive to use more natural gas. Natural gas is an excellent fuel for households and a valuable chemical feedstock, irreplaceable except with great inconvenience. Now it is to be used for power generation, replacing coal, which at present is cheap and abundant, but not so easily used for heating homes or making plastics. This, of course, is a great waste that will lead to sorrow and gnashing of teeth later. There are no more huge natural gas fields like Kansas' Hugoton in the United States, and probably few, if any, in Canada. The United States has been explored exhaustively for oil, when gas was a useless byproduct. Now, it is easy to drill these prospects that only showed gas before. It is not cheap to connect these small fields with pipelines, so gas will actually cost something to produce, which it has not in the past. A great drain like 60% of electric power production, together with rising population, will exhaust these reserves quite rapidly. More gas can be had from Canada (at a price, of course), but this is subject to the same considerations. The Gas Age will not be long at this rate. By conserving natural gas, it could be available to homes and chemical plants for many years. This will probably not be the case, unless the price of natural gas rises enough to compel conservation. The present situation, not caused by shortages of reserves but by the usual economics, at least gives a glimpse of what will happen when the supply wall is finally reached. I do not think that gas can sink below an equivalent price to $8.00 per MCF in the steady state, and will probably rise to $12.00 if supply problems are found. Most of the wells being drilled for gas now extend known fields. It will be interesting to look at how successful the wildcats are. If they are not successful, we have a problem now.
In interpreting what people say, it is best to consider what their interests are and remember the fundamentals of petroleum. No one knows whether a well will find oil, or whether there will be enough reservoir pressure to produce it, or whether the formation will be permeable enough. Only drilling can tell. Before drilling, those interested in the venture will point out how successful drilling in the vicinity, or under similar conditions, has been, and what the wonderful prospects for profit are, in the rosiest of possible terms. It is all part of getting a deal together. This is particularly true of drilling in certain reserved areas. It is the gamble that is important. There is no sure thing; in fact, most such areas are very unpromising. In trying to interest utilities in using natural gas (an effort that has been quite successful) one guarantees long-term supply by presenting every possbility of production as a certainty, multiplying the output of producing fields per acre by the total possible area that could be drilled for gas in the whole region. Disappointment is almost certain here, as there has been drilling for many years, and the region is rather well known. The gas occurs in small fields, often in rather tight rocks. The shallow coal-bed methane can be drilled, produced and abandoned in a few years--it is very much unlike the great midcontinent fields that are now ending production. It's good to remember that oil companies are now run by lawyers, accountants, MBA's and speculators, not by wildcatters, geologists or chemical engineers.
The nature of finite resoures has not yet penetrated economic thought. Rising price does not "produce" more oil the way a rising price produces more wheat. More wheat is actually produced, but more oil is not. Producers of oil essentially ration the supply, not make it. It is like an Easter egg hunt. If you want more Easter eggs, you put more kids out with baskets, and you get more eggs. All the sooner, then, you come to the end of the eggs, and that's it. With finite resources, the steady state is zero. The time factor in oil is just a little longer than the political span of attention. Perhaps it would make the matter clearer to look at some depleted American resources. All were once considered "infinite":
Those marked by * are, in theory, renewable, but it has not worked out that way. How were the depletions overcome? By moving to another location when possible, or by substitution, or by importation. Or by doing without. The option of doing without will eventually become imperative if not attractive. The only energy resource not depleted at present is bituminous coal.
Incidentally, it has recently been estimated that 90% of the large predatory fish stocks are gone from the ocean, and these large fish (tuna, marlin, cod and so forth) may soon be extinct. This is an example of how greed and overpopulation can make even what might seem a renewable resource actually finite. We are at present experiencing the most rapid rate of extinction of species that the world has ever known. The short span of human life makes rapid change seem to be stability.
Thomas Malthus, in An Essay on the Principle of Population (1798), compared the geometric increase of population with the arithmetic increase of renewable resources. The difficulties he foresaw have been offset, to a large degree, by the exploitation of cheap energy. How can you compare any increase in population, or even any population, with a finite resource, one that does not grow at all?
A recent article in TIME on Iraq's oil contains interesting figures that confirm many of the facts mentioned above. Iraqi oil has been known since the 1920's, and recent production (1979) peaked at about 3.5 million bbl daily (about a third of what the U.S. demands, or less than France and Germany together require), but now has dropped precipitately due to war damage and disruption. The average Iraqi well produces 13,700 bbl daily, indicating very permeable reservoirs or high formation pressures, and there are 250 wells in all today. The cost of production is around $1.00 per bbl. By comparison, the U.S. has 508,000 producing wells, which average 17 bbl per day at a cost of around $10.00 per bbl. This demonstrates the inexorable fact of depletion. At no greatly distant date, Iraqi wells will also be making 17 bbl per day.
Estimates of oil in the ground are notoriously unreliable. None are given in the TIME article, but it is mentioned that only 17 of 80 known fields have been developed. One does not know if the 63 undeveloped have actually been drilled and proved, or are just closed contours on a map. The latter is more probable. Simply divide the ultimate resources by the daily production, and you will have an upper limit to the time of depletion. Depletion results not only from no oil, but also no formation pressure or invading water. I imagine Iraq is about as important as the East Texas Field discovered in 1930, whose oil was sold for a dime a barrel. Northern Iraq appears to suffer from low formation pressures; there is no indication if this is natural or due to mismanagement.
Iraq shows clearly how oil is like the Treasure of the Sierra Madre without the hard work. Just slit the bags and it all comes out as quickly as could be desired, but then there is no more. The Iraqi oil minister estimates daily production could rise to 12 million bbl. This would bring depletion three times closer, and lower the price of oil so that profits would not be any larger. The free-market price of oil would be about $12 per bbl, the article says. This would certainly wipe out what is left of U.S. production in short order, and the country would be importing about 80% of its needs, with only a few low-cost fields still in service. As with farming, the response to lower prices is greater production to maintain revenues, which causes a collapse. The present price of oil does not only maintain the Saudi royal family. In March 2003, the U.S. trade deficit of $43.5 billion was not helped by a record monthly $9.1 billion bill for imported oil.
The article speaks of the possibility of Iraq's becoming a swing producer to stabilize short-term fluctuations. In 1973, Texas was the world's swing producer, and then Saudi Arabia. At present, depletion seems to have threatened Saudi Arabia's position, possibly prompting recent actions. The loss of a swing producer will be the first casualty of depletion, long before any actual shortage that will send prices soaring. At present, large investment will result in copious oil, but this is completely dependent on reserves to be developed (treasure to be found). Actually, the greatest short-term threat to the oil supply is turmoil and chaos in Saudi Arabia and Iraq. The per-capita GNP of Saudi Arabia has dropped by half in the last score of years, as its population has doubled. This is a boiler ready to burst.
It is interesting to look for the first signs of a supply crisis based on the actual supply, not on economic and industrial factors. In April 2004 there is so far no crisis, but some interesting developments have taken place. There is news that OPEC will restrict supply slightly in the coming months to support prices, but much more interesting is the observation that non-OPEC producers are producing all they can, indicating that the only swing producers left are in OPEC. Natural gas prices remain high in the United States, which derives 83% of its supply from domestic sources, and 17% from Canada. Vigorous drilling in the past few years has not been able to increase the gas supply, only keeping up with demand. Gas supplies in both the US and Canada seem "mature," which means they are on a steady, irreversible decline, like oil production. This decline has particularly been noted in the Gulf, which has been a primary source since Kansas production collapsed. Rocky Mountain gas is touted in Denver, but it all comes from evanescent coal-bed methane or deep, tight formations, and it is unclear just how much of a contribution it will actually make (accurate figures are confidential, and cannot be obtained; news releases cannot be believed). It would seem to me that gas prices of about $12 per MCF and oil prices of about $80 per bbl within a decade would restrict demand and bring into production other sources (LNG from overseas, oil shale) that will stabilize things for a while. A visit to Cushing, Oklahoma or Casper, Wyoming should give an economist an idea of what petroleum depletion looks like, and its utter permanence. Meanwhile, motor fuel continues at nearly its lowest prices ever in the US, $2.00 per gallon corresponding to $0.20 per gallon when I was small--and that was indeed the price then. Even this pittance causes political rumblings!
On PBS news for 31 March 2004, an "energy expert" said the only hope for energy independence was hydrogen. This shows how "expert" economists can be; there are no hydrogen wells--it is made from natural gas, oil or coal. Hydrogen is only a way of distributing energy, like electricity, but not nearly as efficiently or conveniently. With hydrogen, you still need a source of energy, and lose about half of it converting it to hydrogen.
A report from the Department of Energy's Energy Information Division quoted in the Denver Post on 14 April 2004 predicted the price of oil to be $51 per barrel in 2025 (including inflation). [The price of oil went above $51 on 5 October 2004.] Considering the rate of inflation, this is not really much more than today's $37 per barrel. The report also predicts worldwide energy demand to grow by 54%, and "developing nations" demand to grow by 91%. These figures are most probably smoke dreams, in spite of their apparent precision (why not $50 per barrel, or $52? Why not 61% or 52% instead of 54%?). There is no way that petroleum supplies can increase by 54% (at least not supplies available at $51 per barrel). Most oil now comes from developed fields. and little new oil is being discovered. The Western hemisphere's production is now steadily decreasing, and this decline is irreversible (even with drilling in the ANWR, and other negligible additions). There is no indication in the report on the report that the possibility of supply difficulties may arise in the next 20 years, as it probably will. Economists seem to have no idea where petroleum comes from, and that supplies depend on constant development. Expanding demand and diminishing supply will collide disastrously. If you are driving with increasing speed toward a stone wall, everything will be just fine until the instant of collison. China, indeed, a developing nation with currency resources, will be an important player, and Chinese demand may drive the increase in the price of oil, as it will soon do in the grain markets, since depletion of pumped irrigation water is now taking a toll, causing China's grain production to drop. It will be interesting to observe when oil does reach $51 per barrel, which will probably be long before 2025. Such reports as this one are of very doubtful veracity, and are made just as comforting propaganda by the government's pompous quasi-experts.
On 28 September 2004, the price of crude oil at New York reached $50.47, closing at $49.90. The next day it was at $50.23. This date is somewhat short of the date of 2025 predicted in April 2004. Five months instead of 21 years. This demonstrates how little the "experts" at places like the Energy Information Division of DOE know about the subject. They are really clueless and only produce politically-motivated pronouncements for consumption of the equally clueless. The price increase this time seems finally to be because of persistent supply problems. Producers say they will pump more, but seem unable to do it. Saudi Arabia said they will increase capacity to 11 million barrels per day from 9.5, but this is also just talk. We'll have to see if they actually will be able to produce at this rate; they probably can, with effort, but it will just deplete them sooner. Demand seems to be very inelastic, so things may soon get interesting. World oil demand has reached 82.2 mbpd, up from about 72 mpbd in 1996. A Denver Post article of 29 September has a list of oil "reserves" that are probably estimated reserves, not proved reserves, totalling 1,055 billion barrels. At a consumption rate of 90 mbpd (a conservative estimate for the period) this will last 33 years. The Saudi reserves alone would supply the world for only about 3 years. Oil is being produced at a truly prodigious rate. There will be much wailing and gnashing of teeth in a few years.
On 3 March 2005, West Texas intermediate was selling for $53.06 per barrel. On 29 July, crude oil closed at $60.57 per barrel. The price had been above $60 on several occasions earlier, and it seems to be a rather firm price. Less noticed is the price of nearly $8.00 per MCF for natural gas. Several newspaper and magazine articles have treated the future of petroleum recently, with more realization of the finite supply and coming shortages. Even some petroleum company ads have reflected this tendency. There is renewed activity in LNG importation, with the building of additional unloading facilities. Natural gas in the United States will be rapidly depleted, even with drilling in previously uneconomic tight formations. There have even been murmurs about oil shale here in Colorado, and there is renewed interest in uranium. Without reprocessing, incidentally, there is very little uranium available for use.
In April 2006, futures for light, sweet crude at New York closed above $75 per bbl, and this price has been maintained into May. Futures prices are, of course, determined by speculation, but their behavior reflects fundamental conditions. In this case, the presumed cause is Iran's nuclear program and responses to it. The fundamental condition is tightness of supply, which is becoming more and more apparent. Motor fuel prices in the U.S. are also a concern, rising to about $3.00 per gallon. In this case, we must factor in refining capacity, but the price of crude oil is a major factor. This price must really be considered cheap in the present circumstances. A further rise would help to limit demand, a beneficial outcome. However, the U.S. Congress has reacted in a stupid, short-sighted manner that has become typical. The idea of a $100 rebate paid for out of public funds is particularly stupid, since it would be paid out of taxes. Reducing taxes on motor fuel is also a very dim idea. The President wants to end additions to the strategic petroleum reserve in hopes of reducing crude prices, which experience shows it cannot. It represents only a very small demand. The U.S. now imports about 60% of its petroleum, and this percentage can only increase--the U.S. has, effectively, exhausted its petroleum reserves and nothing can change this.
Now at the end of October 2007, West Texas Intermediate closed at $94.53 and Brent at $90.63. Commentators keep comparing with the peak price in 1980, adjusted for inflation to about $101. However, this was indeed a "peak" with the monthly average price at $20 or below; the peak was due to a crisis. The current price just steadily increases, which is very different. The estimates for "reserves" (sometimes called "proven", but this is something very different. What is meant is "probable".) are probably inflated by a factor of 2 or 3, at least. OPEC is failing to increase output, even though they claim to be doing so.
Additional drilling will indeed uncover new sources of petroleum. This does not represent any additon to capacity, only a replacement for exhausted resources. No new large fields have been found in many years, and there is no hope that any will be discovered in the future. The majors have given up exploration in the U.S., and are looking to foreign supplies. Drilling, both in development of an existing field, and in new locations, has always been a part of the industry, adding proved reserves as existing ones are depleted. In 1999, a natural gas producer's body initiated a program to increase the supply of natural gas by all means possible. The result, as seen in 2006, has been only a 3% decrease in supply and a quadrupling of prices. Estimates of possible reserves cannot be trusted, especially those coming from governments. It is always in the owner's interest to inflate these figures, and to avoid releasing any reliable figures to competitors.
No effective steps to meet supply depletion are currently being taken, and there are not even any satisfactory proposals for action. Hydrogen is a popular hope, neglecting that it is not a source of energy, only a way to store and move it. There are many ways to manufacture hydrogen, but all involve a greater energy input than is available from the hydrogen produced. If it is made by electrolysis, perhaps using wind or photovoltaic electricity, the energy loss is more than 50%. There are cheaper alternatives to hydrogen in any case. The possibility of depletion is not even mentioned in polite society, though there have been a few hints. Shortages are attributed to lack of investment, lack of facilities, or political uncertainties. Economists seem to believe that rising prices will create new supply, but that is a vain hope. Petroleum is not manufactured, only discovered like bags of jewels. One expert recently said that oil will be only $50 a barrel by autumn 2006; another predicts a price of $100 a barrel. Let's see which one is the more accurate prediction! Oil has dropped in price in 2006; at the end of September, it is about $60 per bbl.
Well, at mid-May 2008 the price of oil was about $126 per barrel, having increased by $10 in one week. It is evident that something unusual is happening, and that all the comments about it cannot be trusted. There is probably no longer any surplus production that would be attracted by such a price, OPEC is producing as fast as it can while its "reserves" are much less than advertised, and it is difficult to find oil to meet any increases in demand. There is indeed a lot of oil at the present time, as sources keep protesting, and it is pouring out at the greatest rate ever. The thing is, demand is equal to this profuse supply and is increasing, while the supply is limited.
There is one reason behind the problem with oil, with "climate change", and, finally, with the price of food, which has doubled in the past year and seems to be behaving like the price of oil. That reason is the exponential increase in population. This increase has shown no sign of relenting, in spite of the stagnant population in a few European nations. Since the population doubles in about 30 years, every year now there are 138,000,000 more people to feed, to demand oil, and to emit carbon dioxide. It was said recently that certain plans to reduce carbon dioxide would achieve a 50% reduction by 2050. If things carry on as normal, the population at that time will be some 15 billion, more or less. This is clearly impossible, so something will have to happen between now and then to limit the population to what can be supported. This Malthusian Crisis is really the Inconvenient Truth.
Blame for climate change has been placed on a minor greenhouse gas, carbon dioxide, and it is believed that modest reductions in the burning of fossil fuels will have some effect. Politicians can grasp this connection, though they would probably be surprised to learn that carbon dioxide is essential to life. What is actually happening is that more fossil fuel is being burnt, not less. One of the largest sources of carbon dioxide is, in fact, the clearing of forests and the burning of fields. The earth is actually cooler than average at present, and permanent ice on its surface is not usual, so warming would be expected naturally. If it is indeed anthropogenic, then that is bad news indeed. The only effective method of countering it is to reduce the population. China has taken steps in this direction, but at most slowing the population increase locally. The political cost of any encouragement of population limitation, much less any reduction, is so great that it is not even broached. Humans, apparently, can no more limit their numbers than can yeast cells in a culture. The yeast grows prolifically at an accelerating rate until the nutrition is consumed, then suddenly collapses and dies at its peak. This is a much greater problem than global warming. The Oil Crisis will give us a preview.
Composed by J. B. Calvert
Created 12 September 2000
Last revised 17 May 2008